Investors and financial journalists scrambling to find an explanation for the recent plunge in global stock markets have plenty of suspects. Some look abroad for scapegoats: Greece or China. Others blame Janet Yellen: the Federal Reserve she chairs is at long last on the verge of raising interest rates, if only slightly. Personally, I blame the decline in share values on Donald Trump.
Markets are finally taking note of the fact that the Republican presidential candidate atop the polls is someone who wants to restrict immigration, cut back on foreign trade, and raise marginal tax rates. In each case, Trump's policies are the opposite of the pro-growth approach.
On immigration, Trump has made a name for himself as the restrictionist candidate. Yet scholars describe increased immigration as an engine of economic growth. Michael Mandelbaum's 2014 book The Road to Global Prosperity cites a rough estimate that lifting all global migration restrictions could double worldwide economic output. "Why do we have a special hostility toward persons from a poor country crossing a national boundary on their way to realizing their own potential?" asks NYU economist William Easterly in his 2013 book The Tyranny of Experts. The dean of Columbia Business School, Glenn Hubbard, wrote a book recommending that America seek alliance agreements with the United Kingdom, Japan, and Canada to ease the cross-border flow of labor.
The last time America slammed the immigration door shut, in 1929, with the implementation of President Coolidge's great mistake, the Johnson-Reed Act of 1924, a stock market crash and the Great Depression followed.
Trump's as bad on trade as he is on immigration. The Smoot-Hawley Tariff of 1930 joined with the immigration restrictions to make Herbert Hoover's presidency synonymous with economic disaster. By contrast, the Kennedy round of tariff reductions and the North American Free Trade Agreement and GATT/WTO tariff reductions helped make the 1960s and 1990s times of widespread prosperity. Trump would turn us back to protectionism.
On taxes, Trump wants to raise marginal rates. "The hedge fund guys are getting away with murder. They're making a tremendous amount of money. They have to pay taxes. I want to lower the rates for the middle class," Trump said Sunday on the CBS program Face the Nation. Trump said hedge fund managers who "shift paper around" are "paying nothing," in taxes, "and it's ridiculous." When Kennedy and Reagan lowered the top marginal tax rates, the economy boomed. When tax rates rise at the top—as they did with the Revenue Act of 1932 and with the tax increases of George H.W. Bush and Barack Obama—growth slows.
Not that the Democrats are much better than Trump. The Democratic equivalent of Mr. Trump is the self-described socialist senator from Vermont, Bernard Sanders. He, too, is anti-immigration, anti-trade, and for higher taxes. Even the would-be centrist voice on the Democratic side, Vice President Biden, was reportedly meeting over the weekend with Senator Elizabeth Warren of Massachusetts, who represents the statist wing of the Democratic Party. As for Hillary Clinton, she's been strong on immigration. But on trade, she's been unwilling to stand up for her husband's achievements, or even her own as secretary of State. It's clear that she, too, like Trump and Sanders, wants to increase marginal tax rates.
It's all reminiscent of 2008 and 2009, when, recall, the stock market only really seriously tanked once it became clear that the next president would be Barack Obama, and that Obama would be operating on an agenda of spend, tax, regulate, and polarize.
After the prospect of a Trump or Sanders administration gets priced into the stock market, the "inequality" about which the left is fond of complaining will be dramatically reduced.
This reduction in inequality, though, won't be the result of a constructive approach. It won't involve creating a rising tide of economic growth that lifts all boats. It won't come from focusing on education and skills or tax and welfare reforms that get individuals on the path to what Arthur Brooks calls "earned success." Instead Trump and his enablers in the Republican Party and beyond seem bent on a course of wealth destruction. Here's hoping voters react to the strong signal the market is sending.